Good morning ladies and gentlemen, and welcome to the La-Z-Boy Fiscal 2021 Third Quarter Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Kathy Liebmann. Ma’am, the floor is yours.

Thank you, Holly, and good morning. Thank you for joining us to discuss our fiscal 2021 third quarter results. With us today are Kurt Darrow, La-Z-Boy’s Chairman, President and Chief Executive Officer; and Melinda Whittington, CFO. Kurt will open and close the call, and Melinda will speak to the financials midway through. We’ll then open the call to questions. Slides will accompany this presentation, and you may view them through our webcast link, which will be available for one year. And a telephone replay of the call will be available for one week beginning this afternoon. Before we begin the presentation, I’d like to remind you that some statements made in today’s call include forward-looking statements about La-Z-Boy’s future performance and other matters. Although we believe these statements to be reasonable, our actual results could differ materially. The most significant risk factors that could affect our future results are described in our annual report on Form 10-K. We encourage you to review these risk factors, as well as other key information detailed in our SEC filings. Also, our earnings release is available under the News and Events tab on the Investor Relations page of our website, and it includes reconciliations of certain non-GAAP measures, which are also included as an appendix at the end of our conference call slide deck. With that, I will now turn over the call to Kurt Darrow, La-Z-Boy’s Chairman, President and Chief Executive Officer. Kurt?

Thank you, Kathy, and good morning, everyone. Now, following yesterday's close of market, we issued two press releases. The first release discussed our leadership transition plan announcing my retirement as President and CEO at fiscal year-end, with Melinda named as my successor. And the second release detailed our fiscal 2021 third quarter results. I’m very excited about the new La-Z-Boy leadership team and what they will accomplish in the future. But first, let's review the quarter and then I'll circle back to discussions on the transition of roles. For the quarter, we experienced strong written trends across the entire La-Z-Boy enterprise as consumers continue to allocate more discretionary dollars to their homes in an environment with travel and other leisure-related restrictions. This continues to translate to a build in our record level backlog, even as we add more capacity. Despite the strong written business, delivered sales declined slightly versus the prior year quarter due to greater than anticipated impacts from COVID-19, which I'll detail more in a minute. And we delivered strong consolidated non-GAAP operating margin of 9.5%, including another profitable quarter for Joybird. All of this on a base of last year's third quarter, which was the strongest quarter in the company's recent history for both the sales and consolidated operating margin. In addition, our strong cash generation enabled us to return more than $7 million to shareholders through dividends and share repurchases as declared - and we declared an increase in the dividend to $0.15 per share. Now I'll take a moment to explain the specific COVID-19 impact to the business. Along with the rest of the country, we started to experience an escalation of plant employees needing to be off work due to COVID following the Thanksgiving, and then again following the Christmas and New Year holidays.…

Thank you, Kurt, and good morning, everyone. As always, let me remind you that we present our results on both a GAAP and non-GAAP basis. We believe the non-GAAP presentation better reflects underlying operating trends and performance of the business. As detailed in our press release, and in the tables in the appendix section of our conference calls slides, excluded from our fiscal ‘21 third quarter non-GAAP reporting are; purchase accounting charges related to acquisitions totaling $10.4 million pre-tax, or $.20 per diluted share, primarily due to a write-up of the Joybird contingent consideration liability, based on significant improvements to our most recent financial projections, and income of $5.2 million pre-tax or $0.08 per diluted share for employee retention payroll tax credits the company qualifies for under the CARES Act. Last year’s third quarter non-GAAP results exclude purchase accounting charges of $1.4 million pre-tax or $0.02 per diluted share, a charge of $6 million pre-tax or $0.10 per diluted share related to an impairment for one investment in a privately held startup company, and income of $8.7 million pre-tax or $0.14 per diluted share related to the company's supply chain optimization initiative, which included the closure of our Redlands California facility, and relocation of our Newton, Mississippi leather cut and sew operation. Now on to our results. My comments from here will focus on our non-GAAP reporting, unless specifically stated otherwise. On a consolidated basis, fiscal ‘21 third quarter sales decreased 1.2% to $470 million, primarily due to temporary supply chain impacts from COVID-19. Consolidated non-GAAP operating income was essentially flat at $45 million versus last year's quarter, and consolidated non-GAAP operating margin improved to 9.5% versus 9.4%, mainly driven by strong performance by Joybird. Non-GAAP EPS was $0.74 per diluted share in the current quarter versus $0.72 in last…

Thank you, Melinda. We feel very positive about our business for the long-term. We have always had one of the strongest brands in the industry, and we believe we have further strengthened this over the past year, allowing us to build market share and a more solid foundation from which to grow. At the same time, we have built a sizeable cash position, which provides us the means and flexibility to invest in opportunities that will drive long-term growth and return for all of our stakeholders. Now, onto our other news yesterday, as our press release indicated last night, I have made the decision to step down as President and CEO of La-Z-Boy after 42 years associated with this great company, and I will remain Chairman of the Board. This decision was not taken lightly, and has been in the works for some time. I believe a thoughtful and dedicated leader should be responsible, along with the Board of Directors, for a well-planned and comprehensive leadership transition, so the company may continue to move forward with as few bumps in the road as possible. I believe we have accomplished that. These types of things have a timeline of their own, and for La-Z-Boy, the timing is right. We are rounding the corner on the pandemic. All the company's business units are growing and very profitable. We have a fortress balance sheet. Our backlog is at an all-time high, and our stock price is just about at an all-time high as well. For some perspective, in March of 2009, our market cap was around $30 million, and now is approaching $2 billion. But most importantly, we have the right leader in Melinda Whittington, who has earned the respect of our entire organization and a seasoned leadership team that has been battle tested and has successfully dealt with everything that has been thrown at them. I want to thank our employees, customers, suppliers, and partners around the globe for their continued dedication to La-Z-Boy and their unwavering support. And also, thanks to all of you who have been on the call with - at this journey we've been on. And now, it is my distinct pleasure to introduce the new President and CEO of La-Z-Boy, Melinda Whittington.

Thank you very much, Kurt. I am honored to have the opportunity to lead this amazing company through the next phase of our journey. As Kurt said, we have a great team and a bright future ahead, as we leverage our strong foundation and build our next chapter. I'm also thrilled today to introduce our new CFO, Bob Lucian, who is joining us for today's call. Welcome, Bob, and congratulations. And while we still have several months of transition ahead of us, and I know I can count on Kurt's continued mentorship, I would also like to be the first to publicly thank Kurt for everything he has done to build La-Z-Boy into what it is today. I wish him the very best in his retirement. Kurt and I thank you for your interest in La-Z-Boy Incorporated. And now, we'll turn our call over to Kathy to provide instructions for getting into the queue.

Thank you, Melinda. We'll begin the question-and-answer period now. Holly, please review the instructions for getting into the queue to ask questions.

Your first question for today is coming from Bobby Griffin. Bobby, please announce your affiliation, then pose your question.

Good morning, everybody. This is Bobby from Raymond James. Thank you for taking my questions and congrats on managing another challenging quarter. I guess, first, Kurt, congratulations on retirement. It's been a pleasure to work with you, and I wish you nothing but the best happiness and health in retirement.

Thanks so much for those comments, Bobby. I've been - it's been a long relationship for us with Raymond James and you for the last number of years as well.

Thank you. And Bob - Melinda and Bob, congrats on the new roles. Look forward to continuing to work with you guys and seeing what the next chapter at La-Z-Boy is.

Thank you. We’re excited as well.

Thank you.

So, I guess first for me, maybe, can we just get a quick update with extended backlogs on any changes in cancellation rates? I believe when we talked last time in the last quarter, you guys hadn't noticed any really material changes, but there was expectations for a little bit better capacity coming online this quarter. Has anything changed in how you're servicing customers and keeping them happy with the extended backlog times?

It's a great question, Bobby, and nothing has materially changed. The amount of demand we're getting even though we're producing more furniture every month is keeping the backlog out a lot farther than we'd like, and customers are not thrilled with that but that is the state of the industry. So, it's not just a La-Z-Boy problem, it is for everybody. And the demand is still high starting off in January, our demand has been surprisingly strong to what we'd have anticipated. So, let me make a comment about all the little hiccups we've had with parts and people and COVID, whatever you want. Individually, any one of them is not that significant and could be overcome, but when you get them coming at you from six or seven different directions, the magnitude of it adds up. So we - I forget what the number was, but we could have produced, I don't want to say significantly, but I think the number was around $30 million more of business if we hadn't had the disruptions with parts and foams and freight and things coming in on time. You make the corollary, if you want to the car industry, now without the chips, they can't - they have the capacity to make a lot of cars, but without these component parts, they have to stall and we ran into that. So, we will continue to hire. We will continue to get more capacity, but we don't know what hiccup may come at us in the future. And so we're just cautious in what we're projecting going forward.

Okay. That's helpful, and good news that the cancellation rates haven't materially changed. If we look at the 4Q sales guidance first, the prior commentary around it, those elements, a little bit lower. Is that just a function of the challenges in the supply chain just continuing longer than your original expectations? And if so, would you expect Canada to make that up - that difference up in basically the first quarter, just as the improvements have been shifted out further in the future basically?

That's exactly right, Bobby. We will continue to increase raw production capacity. We've been doing it month to month here since - basically since we opened up again back at the beginning of May, and that march will continue on through end of this coming summer event. But at any given time, as Kurt said, with the variety of input challenges that we're managing through, it just keeps holding us back from getting to that max number on any given month. That said, the underlying capacity continues to increase. The only thing I might clarify a bit is, the catch-up factor is a challenge because we are every day set up to max out everything we can possibly make. So, if you lose a couple of days because of ice and snow all over, the majority of the United States, you don't - you can't just run an extra Saturday or run an evening shift to make that up in near term, because those extra shifts were already planned to continue to work against the existing backlog.

Understood. Okay. That's very helpful. And I guess lastly for me, just kind of a two-part question on the written business. So, if we look at the trends for the 350-ish network galleries, visible network galleries, was there just some - was there some weird ebbs and flows during the quarter? Because even on a two-year stack basis, it does look like it's slowed a good bit, but then reaccelerated in January. Was there just some timing on industry or kind of customers coming in or any weather or anything like that? And then the second part of my question is, when you look outside your La-Z-Boy distribution, how are the written trends for the non-La-Z-Boy side of your distribution network?

Yes. I would say, similar to what we heard around most of the industry, November and December started to slow. Again, we're at - in an industry that generally grows 2% to 3%, we're at 18% year-to-date written same-store sales. But November and December, I think most of our industry saw some flowing, still growth, right, but those rates slowed. By the time we got to January, we're back up in the near double digit kind of numbers across virtually all the businesses. So, we don't track written in the same way on the businesses that we don't sell direct to consumer, like we do for our furniture galleries, but really we continue to see that growth coming in across all the businesses, and that's why you see, even with making more furniture each quarter, we still had our backlog grow from Q2 to Q3 by like over 25%, so that demand continues to build.

And that is not all furniture gallery demand. Another fact, Bobby, to kind of gauge how we're doing, the numbers that we've seen, so we told you today that our same-store sales for calendar ‘20 were up 6%. And I think the latest industry numbers we've seen was the industry was down 1% for the calendar year. So - and remember, all those numbers are with sometimes a month or longer of our stores being shut down. So we're - I think we gained some share last year, and if we don't have a continued supply and COVID problems, I think we have that opportunity again this year.

Understood. Well, thank you again for taking my questions. And Kurt and Melinda and Bob, congrats again on the announcements, and Kurt, your accomplishments during your tenure. It's been fun to watch.

Thanks, Bobby.

Thanks, Bobby.

Your next question is coming from Anthony Lebiedzinski. Please announce your affiliation, then pose your question.

Yes. Good morning. Yes, this is Anthony Lebiedzinski from Sidoti & Company, and thank you for taking the questions. Yes, and congratulations, Melinda and Bob on your promotions, and Kurt, congratulations on your pending retirement. Certainly, it's been a pleasure working with you, and certainly look forward to working with you, Melinda and Bob. So, first, I just wanted to follow up, as far as the January reacceleration in - for sales, it’s really encouraging to see. Is this - would you say this is partly maybe attributable to the stimulus checks that went out, or do you think there's other factors at play here? And if you could maybe comment on what you saw over President's Day weekend?

Well, I can't give you an exact data on what caused the uptick. Was it vaccines starting to be given to people and they felt more comfortable shopping? Was it a mild January that kept people out? The stimulus checks probably had some impact, although I don't - I'm not sure how - what proportion of our customers will receive the stimulus check. But all those things figure into the momentum. And President's weekend was heading in a really - in a strong direction until the snow came on Monday and kind of put a damper on Monday, which is the biggest day of the weekend. So, that was not helpful. But it did show that in the Friday, Saturday, Sunday leading up to it, that demand was still strong. The customer was out shopping and we were pleased with what we saw. But the biggest day is Monday, and we certainly didn’t achieve last year's numbers.

Got it. Okay. Thanks for that. I mean, certainly you can’t control the weather for sure. As far as Joybird, I was just wondering if there was any - you feel there's room for additional synergy and movement? We talked about gross margin improvements. Just wondering how we should think about the sustainability of Joybird’s profitability improvements?

Yes. So I'll take that in two pieces. And certainly, the gross margin improvement, we've been working for a long time on a lot of individual pieces that are all really coming together. And our plan is that that gross margin improvement should stay very sustainable going forward. Of course, obviously subject, like any business now, right, to ongoing increases in input costs and ability to price against that. Relative to the true bottom line though on operating margin, what we've always said is that we will test what does the return look like on investments in marketing to really grow that business. And our goal on Joybird isn't necessarily to maximize margin right now, but to get a prudent margin and grow that business. And that's why we were so pleased this quarter, being able to leverage that gross margin and leverage great returns on our marketing investment to still deliver a profitable quarter, but also deliver a 79% written sales growth for the quarter compared to last year. So I think we’re figuring out that model.

Got it. Okay, great. And then last question for me here. So as far as the record high cash balance, what would you say would be the top priorities for usage of that cash going forward here?

Certainly a healthy chunk of our focus - well, I'll start by saying, we will continue to be conservative because this pandemic thing isn't over yet. And that's always been our nature. But no doubt, we are building a really significant chest. And with that, it provides us an opportunity to look at investments in our business, and we're already starting to do that. Recall, at the beginning of the year, we basically stopped all capital investment until we knew what was going to happen with the business. So as we turn that valve back on, obviously we're investing in our new locations and additional capacity, both in Mexico and across our production network. We have turned back on the remodel of our Neosho, our second largest facility that we had temporarily paused there. We are investing in our retail stores at an increased pace, both in remodeling to represent the fashion of our brand, but also the technological capabilities to help both our employees, but also the consumer experience when they're in our stores, and technology upgrades for our own company and corporately to increase our efficiencies and capability. So I think you’ll continue to see us doing more of that, and really leveraging the benefit of the increased sales that we've been able to experience with the pandemic. Beyond that then, of course, we increased our dividend this quarter, which shows the board support of this as well. And we did, as you know, turn on our share repurchase back in December. Didn’t get a lot bought because we turned it on in the middle of the quarter, but we're back in the market on share repurchase as well.

Got it. Okay. Thank you very much and best of luck.

Your next question is coming from Brad Thomas. Please announce your affiliation, then pose your question.

Hi, good morning. It's Brad Thomas with KeyBanc Capital Markets. And first of all, Kurt, congratulations to you on a tremendous career and your leadership of La-Z-Boy. And Melinda and Bob, congratulations to you both on your promotions, all very deserved. I wanted to follow up on the Joybird comments. And wondering, Melinda, if you can give us a little bit more color on how you think about what the right growth rate should be for Joybird going forward. I still think of it as being a young business with a tremendous amount of opportunity, both in terms of its online opportunity, as well as its opportunity to start getting its own stores. And how do you think about what the right growth rate is for this business, and what are the plans to add stores as the world starts to get a bit more normal here in the future?

So, Brad, I think obviously one of our interests in Joybird when we bought them was, we felt it was a business that could grow faster than our core, and we still believe that. And we don't know in any of the businesses we're in and in Joybird, what is the COVID factor right now for volume, and how long is that going to stay? So, that is in these calculations, but I think Joybird has got a great trajectory. I think it it's got the - a new website that's been up for a few months, the connection to the customer. Very pleased with the 79% same-store quarter. And so, we bought the business when it was around $40 million. We'll do in excess, I believe, of $100 million this year. And it's a profitable business, which was one of our goals. But as Melinda just said earlier, we're going to balance the fact between reinvesting in the marketing to grow and being sure that it does have a reasonable return. It may not have the same return as all of our other businesses, but if it has double the growth, we would accept that. So, we think there's a lot of growth. To give you a number now would be guessing on our point, but it will grow faster than the base enterprise, and I think you'll see a great acceleration here in the future.

That's helpful, Kurt. Thank you. And the next topic I wanted to talk about a bit is what you're seeing on the raw material front. This is a question that comes up a lot with investors about how much risk there is in the economy from inflation. Can you talk a little bit about what you're seeing from a raw material standpoint, what you're passing through at this point, any more color on the degree of price increases that you're passing through, and how you're thinking about that system, Kurt.

I’m going to let Melinda handle that, but I didn't - I failed to mention, we are going to continue to open stores at Joybird, too. We've got a couple we're just making a final decision on here near-term. So I don't believe they'll ever have 100 stores at all, but they will have stores in the key markets where they're already doing tons of online business. And so, we truly have that Omni experience. And the stores to date, in most cases, have exceeded our expectation. So getting Joybird more stores is part of the growth strategy. Melinda, you can talk about the - our raw material challenge.

Sure. So obviously given demand, we're seeing pressure on raw material input costs, and honestly, all supply chain costs, including freight pretty much across the board. Back in October, we announced pricing. And that of course was only our new written orders. So it's going to be - we're in fourth quarter before those written orders are starting to become delivered orders and we're starting to see the benefit of that, even though the cost pressures are already there. We are evaluating - continue to evaluate. If you look kind of around the industry, you'll see that another round of price increases starting to show up in a lot of the industry. And in general, our industry, you'll see these be, to your point, on order of magnitude. You’ll see them in the low to middle single digits over the last year, I think is probably the right kind of planning number. And so, the good news about our industry is that it has always been pretty resilient to the pricing when there are real input costs to pass through. Freight, as I said, is another one that you have to continuously evaluate, but we have been able to generally pass that through in the past. And we're trying to be fair with our customers. It's a little painful when we've got this long backlog to only price on new written orders and not on existing backlog, but we also are striving to be very good partners with our customers in these challenging time, and not essentially pinch them by increasing prices on orders they've already written to their customers. So it is fluid. Definitely there is cost headwinds, and we continue thus far to be able to experience pretty positive ability to price. There's no doubt at some point that might have some impact on end consumer demand. That could be the case. We certainly have not seen that thus far.

Very helpful. If I could just squeeze one more in. for your fourth quarter, the guidance implies that you would do about - I believe about $20 million to $40 million more in revenue in your April quarter than you just reported in your January quarter. Obviously, this implies that you'll be getting productivity expanding during the quarter to meet those levels. And so, I presume it's fair to say that you guys are ramping up and feeling like you're seeing that productivity and that run rate improve at this point.

We are making progress every single month in our ability to make furniture since the month we opened up back in May, and we expect that progress to continue all the way through back end of the summer. But again, what we found this quarter and what we expect, we're just planning for it at this point is that there will continue to be challenges in either - this past week it’s been weather, right. That has shut down either the ability for our employees to get to plants or for our suppliers, employees, to get to plants or for our trucks and supplies to get to plants. Certainly the holidays, as Kurt’s comments - alluded to in his comments, the holidays were really tough for keeping employees safe and folks having to self-report and stay out of work for a while. We’ve had challenges in our - with shipping lanes to get finished goods products, some of our international businesses, our case good products and materials in for our component materials and for our parts. So it just seems like the world stage right now is wrought with a lot of challenges. So what we can control is continuing to make that pipe bigger on the number of units we can make each month, and plan to be as agile as possible. But yes, no doubt, your opening comment is right. We do intend to be able to make more furniture each month than we did the last month, and that has been true thus far.

Just another input for you, Brad, and what you're trying to look at. The fourth quarter has calendar wise, more production days than the third quarter, because you have the holidays in the third quarter. And so typically, we have more production days, although we lost a couple yesterday and Monday with the snow. The impact on the southern part of the country and with the freezing and the snow and the power outage and everything, that's where we have most - that's where we have all of our domestic plans. That suspended things for a few days, but in the magnitude of the quarter, we kind of took that into consideration. But there is - we take Good Friday off. I mean, we take Thanksgiving off. We take the week between Christmas and New Year’s off, and other than Good Friday, there's no holiday dates that our plants aren't working. So, that's an added factor as well.

Very helpful. Thank you both so much.

There are no more questions in queue.

Thank you very much, everyone, and have a great day. Bye-bye.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.